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212 lines
6.8 KiB
212 lines
6.8 KiB
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<ARTICLE ID="XACC-INCOMEEXPENSE">
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<ARTHEADER>
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<TITLE>Using Expense/Income Accounts</TITLE>
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</ARTHEADER>
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<SECT1>
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<TITLE> What are Incomes and Expenses?</TITLE>
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<PARA> </PARA>
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<PARA>The words "Income" and "Expense" are beguilingly simple;
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everyone <EMPHASIS>thinks</EMPHASIS> they know what they mean; this <EMPHASIS> usually</EMPHASIS> is that <EMPHASIS>When I spend something, this is an
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expense, and when I get money, this is an income.</EMPHASIS>
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</PARA>
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<PARA>This oversimplifies things somewhat; it is often a <EMPHASIS> good-enough</EMPHASIS> approximation when doing personal accounting,
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but when running a business, incomes and expenses often have be
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recognized as having occurred when some "critical event" takes
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place that may not perfectly correspond to "when cash comes in
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or goes out."
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</PARA>
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<PARA>For instance, companies usually have to recognize income
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<EMPHASIS>when the sale occurs.</EMPHASIS> That may mean that I have to
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recognize a $100,000 sale <EMPHASIS>at the moment I and the customer
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shake hands on the deal.</EMPHASIS>
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</PARA>
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<PARA>Since the money hasn't come in, the sale has to be estimated
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in other way; the way this is done is to <EMPHASIS>accrue</EMPHASIS> a sale
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at that time, and in making the transaction balance, rather
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than adding something in to cash, I'd add the $100,000 sale to
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<EMPHASIS>Accounts Receivable.</EMPHASIS>
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</PARA>
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<PARA>In a double entry system, two kinds of accounts must be
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created: some of type "Income" and others of type "Expense."
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(There tend to be a lot more different kinds of expenses than
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there are of incomes.)
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</PARA>
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<PARA>Income such as salary, wages, bank interest and stock
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dividends are then recorded as transfers from an income account
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to a bank (or, in general, some asset) account. Similarly,
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expenses are recorded as transfers from a credit card account
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(or, in general, a liability account).
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</PARA>
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<PARA>Another way of describing the requirement for "double entry"
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is that when you receive an income, two things happen:
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<ITEMIZEDLIST>
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<LISTITEM>
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<PARA>You receive a sum of <EMPHASIS>money,</EMPHASIS> and must record that
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effect on your bank account.
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</PARA>
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</LISTITEM>
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<LISTITEM>
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<PARA>You have received an income, and must record that effect
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on an income account.
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</PARA>
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</LISTITEM>
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</ITEMIZEDLIST>
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</PARA>
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<PARA>When, for instance, salary is deposited in a bank account,
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the bank account is credited, and the income account is
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debited, thus:
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<TABLE>
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<TITLE>Accounting for Salary</TITLE>
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<TGROUP COLS="3">
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<THEAD>
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<ROW>
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<ENTRY>Account</ENTRY>
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<ENTRY>Debit</ENTRY>
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<ENTRY>Credit</ENTRY>
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</ROW>
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</THEAD>
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<TBODY>
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<ROW>
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<ENTRY>Chequing Account</ENTRY>
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<ENTRY>1,600.00</ENTRY>
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<ENTRY> </ENTRY>
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</ROW>
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<ROW>
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<ENTRY>Salary</ENTRY>
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<ENTRY> </ENTRY>
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<ENTRY>1,600.00</ENTRY>
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</ROW>
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</TBODY>
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</TGROUP>
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</TABLE>
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</PARA>
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<PARA>This may be readily extended to a greater number of "split"
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items thus:
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<TABLE>
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<TITLE>A More Complex Paycheque</TITLE>
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<TGROUP COLS="3">
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<THEAD>
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<ROW>
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<ENTRY>Account</ENTRY>
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<ENTRY>Debit</ENTRY>
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<ENTRY>Credit</ENTRY>
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</ROW>
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</THEAD>
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<TBODY>
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<ROW>
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<ENTRY>Chequing Account</ENTRY>
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<ENTRY>1,300.00</ENTRY>
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<ENTRY> </ENTRY>
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</ROW>
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<ROW>
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<ENTRY>Income Taxes</ENTRY>
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<ENTRY>200.00</ENTRY>
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<ENTRY> </ENTRY>
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</ROW>
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<ROW>
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<ENTRY>Health Plan</ENTRY>
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<ENTRY>100.00</ENTRY>
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<ENTRY> </ENTRY>
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</ROW>
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<ROW>
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<ENTRY>Salary</ENTRY>
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<ENTRY> </ENTRY>
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<ENTRY>1,600.00</ENTRY>
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</ROW>
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</TBODY>
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</TGROUP>
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</TABLE>
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</PARA>
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<PARA>There may be a whole lot more than two entries in the
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transaction, but the total sum of the Debits, $1,600.00, still
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equals the total sum of the credits, $1,600.00.
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</PARA>
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<PARA>If, as with <EMPHASIS>GnuCash,</EMPHASIS> everything is forced onto one
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column, so that <EMPHASIS>debits</EMPHASIS> are represented by positive
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values, and <EMPHASIS>credits</EMPHASIS> are represented by negative values,
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the income/expense accounts do a slightly non-intuitive thing
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and you see incomes as <EMPHASIS>negative</EMPHASIS> values. That <EMPHASIS> appears</EMPHASIS> contrary to intuition, but is nonetheless
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necessary in order for the <LINK LINKEND="IDENTITY"> double-entry bookkeeping identity to hold true.</LINK>
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</PARA>
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<PARA>Another way in which income and expense accounts are special
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is that their account totals do not directly appear on a
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balance sheet. A balance sheet shows "Net Worth": the sum of
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all assets minus all liabilities.
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</PARA>
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<PARA>Income and expenses are neither assets nor liabilities, and
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so do not appear on the balance sheet. What appears on the
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balance sheet is their effects on <EMPHASIS>equity.</EMPHASIS>
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</PARA>
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<PARA>There is a separate report, a "Profit and Loss" (P&L)
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report, to analyze income and expenses. The total profit (or
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loss) is calculated as total income less total expenses. In a
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nicely symmetrical fashion, since assets and liabilities are
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neither income or expenses, <EMPHASIS>they</EMPHASIS> correspondingly do
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not appear on a P&L statement.
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</PARA>
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<PARA>Even though these accounts may be somewhat "special", you do
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not need to do anything particularly special to use income and
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expense accounts. GnuCash handles the values automatically, so
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that if you record properly the effects of the transactions on
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your bank account or credit card, the income/expense side of
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the transaction should also be handled correctly.
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</PARA>
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<PARA>The time when things get "peculiar," and when you need to
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more deeply understand this, is when amounts are transferred
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between income/expense accounts. (The <EMPHASIS>causes</EMPHASIS> for such
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transfers tend to be somewhat peculiar, so it's pretty fair for
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this to be a pretty odd situation.)
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</PARA>
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</SECT1>
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<SECT1 ID="XACC-INCEXPUSE">
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<TITLE> Using Income/Expense Accounts</TITLE>
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<PARA>To use an income/expense account, simply create one from the
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"New Account" dialogue window, and then be sure to transfer
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income/expenses to it as you record paychecks, interest,
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etc.
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</PARA>
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<PARA>You will doubtless wish to create quite a number of income
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and expense accounts; it may be worth looking at the <LINK LINKEND="XACC-SAMPLECHART">Sample Chart of Accounts</LINK> for
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ideas.
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</PARA>
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<PARA>This partitioning of incomes and expenses is likely to prove
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particularly useful for North Americans when <EMPHASIS>income tax
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time</EMPHASIS> rolls around.
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</PARA>
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</SECT1>
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<SECT1 ID="XACC-TERMSOTHER">
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<TITLE> Use of Terminology In Other Software</TITLE>
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<PARA> </PARA>
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<PARA>If you have used other personal finance software, be aware
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that <LINK LINKEND="XACC-QUICKENCATS">Quicken calls them
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"Categories."</LINK>
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</PARA>
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</SECT1>
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</ARTICLE>
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